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Bear of the Day: Yum China Holdings, Inc. (YUMC)

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Yum China (YUMC - Free Report) , a Zacks Rank #5 (Strong Sell) stock, owns and franchises restaurants in China. The company operates restaurants under recognized brands such as KFC, Pizza Hut, Taco Bell, Little Sheep, and Lavazza. Yum China is running over 12,000 restaurants in approximately 1,700 cities. The company was incorporated in 2016 and is headquartered in Shanghai, China.

The Zacks Rundown

Yum China, which became an independent, publicly-traded company in 2016, has been severely underperforming the market over the past year. YUMC experienced a climax top in June of last year and has been in a price downtrend ever since. The stock has hit a series of 52-week lows this year and represents a compelling short opportunity as the market continues its volatile start to 2022.

YUMC is part of the Zacks Retail – Restaurants industry group, which currently ranks in the bottom 23% out of approximately 250 industries. Because this industry is ranked in the bottom half of all Zacks Ranked Industries, we expect it to underperform the market over the next 3 to 6 months. Also note the unfavorable valuation characteristics for this group below:

Zacks Investment Research
Image Source: Zacks Investment Research

Candidates in the bottom half of industry groups can often represent solid potential short candidates. While individual stocks have the ability to outperform even when included in poor-performing industries, their industry association serves as a headwind for any potential rallies. Yum China is fighting an uphill battle and the stock is confirming this notion as it continues to make a series of lower lows.

Recent Earnings and Deteriorating Forecasts

The company reported its first quarter results last month. YUMC posted quarterly EPS of $0.24, missing the Zacks Consensus Estimate of $0.29 by -17.24%. For the current quarter, Zacks is anticipating a significant EPS decline to $-0.01/share, reflecting negative growth of -102.38% year-over-year.

YUMC has missed the mark in terms of earnings estimates in each of the past four quarters. The restaurant operator has posted a trailing four-quarter average earnings miss of -29.33%. When you’re missing consensus estimates by that amount over time, you’re going to be fighting against the current when it comes to the stock price.

Analysts covering YUMC have decreased their annual earnings estimates recently. For 2022, the current Zacks Consensus Estimate sits at $0.77, down -45% from just 60 days ago. This would represent a negative growth rate of -36.36% relative to fiscal 2021.

Technical Outlook

YUMC stock has been steadily falling since last year and has now established a well-defined downtrend. Notice how 200-day (red line) moving average is sloping down. Shares have declined more than 35% in the past year. The stock continues to trade below the 200-day moving average, which has acted as resistance throughout the price move:

Image Source: StockCharts

Even with the recent declines, YUMC is still relatively overvalued, irrespective of the metric used:

Zacks Investment Research
Image Source: Zacks Investment Research

Final Thoughts

Recent earnings misses and an unpredictable equity market don’t exactly favor bullish YUMC investors. Our Zacks Style Scores depict a weakening outlook for this stock, as YUMC is rated a second worst-possible ‘D’ in our Value category and a ‘D’ for our overall VGM score. A deteriorating fundamental and technical backdrop show that this stock is fighting an uphill battle.

The fact that YUMC is part of one of the worst-performing industry groups simply adds another headwind to a long list of concerns. Potential investors should only think about including this stock in their portfolio as part of a hedge or short strategy. Bulls will want to steer clear of an overvalued YUMC until the situation shows major signs of improvement.

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